1997 Tax Reform - Great for Real Estate!

Real Estate Agent with Compass

  Seal of the President of The United States of America                                                  President Bill Clinton

The Taxpayer Relief Act of 1997 - signed into law by President Bill Clinton together with the Balanced Budget Act of 1997 is probably the most significant change in recent times affecting real estate. This law made some major improvements for Home Sellers, Property Owners and First Time Home Buyers. It simplified taxes for 99% of Homes sold in the U.S.

Since 1997 Home sellers are eligible to exclude up to $250,000 if single or up to $500,000 if married, of the capital gain on the sale of the residence. In order to be able to claim the entire exclusion, the home seller must have owned and resided in his home for at least two years of the last five years prior to the sale of the residence. If eligible for the inclusion, it may be claimed once every two years.

If the home was sold because of a change in employment, health, or other unforeseen circumstance, the home seller may be eligible to claim a partial exclusion of capital gains even if he or she didn't live in the home for a total of two years of the last five before the sale. The portion of the partial exclusion is calculated based on how long the seller lived in and owned the home. The exclusion relates to the gain only, not the gross sale price. Broker's commission is deducted from the gross sale price as is capital improvements and closing costs.

Prior to the Taxpayer Relief Act of 1997 the tax law allowed rollover that required reinvestment in a home of greater or equal value. The previous law also allowed a one-time capital gain exclusion of $125,000 for taxpayers over age 55 who sold their homes.

This tax reform enabled many to keep much of their wealth that they accumulated from the sale of their homes.

The 1997 tax reform law also allows early withdrawals from Ira's without penalties of up to $10,000 for First Time Home buyers. The law defines first time home buyers as any one who has not owned a home for the past two years. The cap gain tax was also lowered from maximum 28% to maximum 20%.

The reason I'm writing this blog is because many home buyers and sellers do not realize what a great capital gain exclusion this is. I recently had a buyer interested in my property at an Open House go into a whole complicated tax scenario about selling his current home and rolling over the profits to buy my listed property. I asked him if he was an investor. He said no. I asked if his current home was his primary residence and if he had lived there for two years out of the last five. He said yes. I told him he had a $250,000 exclusion every two years, and he didn't have to reinvest in another property for tax purposes. I told him he can buy and sell a new home every two years and keep up to 250,000 profit. No other asset class has that exclusion. Only real estate. I told him to confirm with his tax advisor.

The Taxpayer Relief Act of 1997 has helped many sellers. Many who did not have to wait until age 55 to get an exclusion and helped fuel the hot real estate market these past 10 years.

This same 1997 Tax Reform law also helped to revitalize distressed urban areas by creating empowerment zones. The creation of urban empowerment zones to promote business development. All one has to do is walk through Harlem today and it is quite evident that this once distressed part of Manhattan is revitalized. New condos are everywhere. Shells of Brownstones have been converted to new condo Townhouses. Major banks, retail chains, real estate brokerages and hotels have opened and are opening on 125th Street and throughout Harlem. Bill Clinton currently has his office in Harlem.



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Ken Cook
Content, coding, marketing, host. - Marietta, GA
Content Marketer/Creator

Great post! And a very good reminder and lesson to people who don't know what happened to make home ownership or real estate investing the best place you can put your money - if you're smart about it.

Just to set the political record straight, however, former President Clinton may have signed the bill but it was in no way created by him nor overly supported by the Democratic party. In fact 99.6% (all but one) of Republicans voted in support of the bill 41 Democrats opposed the Bill. It was certainly an excellent bill and by definition an event that enormously boosted the RESULTS of home ownership (investment in real estate). In fact, it was so hated by some liberals they renamed it "The Landlord Relief Act of 1997" or just another way to exclude the "poor and hardest working people". Kind of odd, if they truly were the hardest working they wouldn't be the poorest, now would they? Anecdotal.

Sep 25, 2006 09:50 AM #1
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Mitchell J Hall

Lic Associate RE Broker - Manhattan & Brooklyn
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